Form W-8BEN : Definition, Purpose and Instructions

what is a w8

Not only that, but they can assist in onboarding workers to take the burden off of your HR department. Learn more about what to look for in an employer of record in our on-page guide. When managing international workers, maintaining compliance is critical. Failure to do so opens you up to fines, penalties, and litigation, which can effectively deny benefits to your team. A 1099-INT is the tax form used to report interest income to investors and the IRS.

Failure to submit a Form W-8BEN could result in paying either the full 30% rate or the backup withholding rate under section 3406. The version of the form used is determined by both whether or not the filer is an individual or a business and the nature of the income the filer received. The forms are effective for the year in which they are signed and three calendar years afterward. Therefore, a W-8BEN signed on Jan. 25, 2022, would be valid through Dec. 31, 2025. These forms are requested by the payers or withholding agents and kept on file with them—not filed with the IRS. Organizations operating in the United States need to have accurate tax ID information in order to report income that is paid to their suppliers.

Solving The Procurement Data Dilemma

Sign up with your credentials or register a free account to test the service before choosing the subscription. Heather Hudson has been a freelance writer for more than 17 years. As a small business owner, she understands the triumphs and challenges of life as an entrepreneur. And as a long-time FreshBooks customer, she’s always looking for ways to work smarter, not harder. Completing Form W-8BEN confirms to the IRS that you are not a U.S. resident, that you do not work in the U.S., and that you will report your income to the Canada Revenue Agency. A favorable exchange rate may even mean Canadians can pull in some extra bucks when working with an American client, doing the same work they provide to Canadian clients. Every Canadian freelancer or sole proprietor appreciates a good U.S. client or two.

  • In addition, money made by a foreigner through investments in a partnership that conducts trade or business in the U.S. would also be treated as ECI.
  • A saving clause preserves or “saves” the right of each country to tax its own residents as if no tax treaty existed.
  • As explained,the US entity you are doing business with is entirely responsible for assessing whether you are eligible to pay the withholding tax or not.The US entity will use its own CPA to define your status.
  • Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
  • Additionally, W-9 forms are not mandatory to be signed and they never expire.

Part I identifies the name, location and the beneficial owner, which for purposes of Forms W-8, is the owner of the account. You must provide your local tax or social identification number for the form to be valid. The goals of the W-8 forms are to help the IRS keep track of how much income is being sent to individuals and entities overseas, as well as to determine the correct tax withholding rate. To make things even more fun, there are five different W-8 forms, each of which can be used to manage tax requirements for entities that declare a foreign tax ID status. Foreign freelancers don’t need to fill out all five forms, however. They need to determine the right form based on their type of business and purpose.

Canada Tax 101: What Is a W-8BEN Form?

Check this box for line 14b, which is related to U.S. tax treaties that have limitations of benefits article as is the case for Canada. Used by the following entities to claim exemption from tax withholding, foreign governments, foreign tax exempt organization, foreign private foundation, government of a U.S. possession, or foreign central bank of issue. A W-8 form for all foreign aliens/entities is needed for all payments. The foreign alien/entity will need to determine the type of form that applies to them. If a withholding agent fails to collect Form W-8 from an individual or entity and doesn’t withhold taxes, the withholding agent may be subject to a penalty of up to 30% of payments they made to a payee outside the U.S. In other words, they must pay the taxes that the payee didn’t.

what is a w8

The income they receive is considered “effectively connected income” by the IRS. It’s important to note that ECI is not subject to the same 30% withholding rate.

What is a W8 form for?

The payee needs to file the Form W-8BEN before the first payment to prevent withholding of the full 30% what is a w8 of U.S. income tax. This is a significant advantage, as the withholding tax rate is normally 30%.

What’s the purpose of a W8-BEN?

To stay in compliance with current IRS rules and regulations, you probably issue Form 1099 to your independent contractors who are U.S. citizens (even if they’re living abroad) or those who live in the United States and have the right to work here. If you hired someone from a foreign country to perform services for your company, you may wonder if you are required to issue that contractor a 1099 form at the end of the year. The answer is probably no, especially if your contractor is not conducting business on U.S. soil and lives in a foreign country. However, you are responsible for maintaining records documenting that your contractor is truly not a U.S. citizen or resident and therefore shouldn’t be issued end-of-year forms (like 1099s) or be subject to withholding tax. And that’s where the W8-BEN comes in. To ensure that your company is in compliance, you should request a completed Form W8-BEN instead of a Form W-9 from a contractor who is foreign. (You use Form W-9 for U.S. contracto…  Ещё

James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media. Supplier Data Consolidation A single source of truth for supplier data across the enterprise. Part I of the form requires general information, the Chapter 3 QI status, and the Chapter 4 FATCA classification of the filer. As this form is complex we strongly suggest that you read the instructions for the completion of the form available for free on Additionally you should consult your local tax advisor. Please declare your traffic by updating your user agent to include company specific information. However, working with U.S. companies means you need to be aware of applicable tax legislation, including Form W-8BEN. Here are all the answers you need to understand and complete Form W-8BEN.

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